Bilateral trading with naive traders

R.R.S. Saran

doi:10.1016/j.geb.2010.09.009

Bilateral trading with naive traders

R.R.S. Saran^*

^*Corresponding author for this work

Microeconomics & Public Economics

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

We introduce naive traders in bilateral trading. These traders report their true types in direct mechanisms and bid/ask their values/costs in auctions. We show that by expropriating naive traders in direct mechanisms, the mechanism designer can subsidize additional trades by strategic traders and improve efficiency. In fact, complete expropriation of naive traders is a necessary condition for constrained efficiency. A significant implication is that in the presence of naive traders, ex-post individually rational mechanisms are not constrained efficient. In contrast, if the traders must use a given mechanism, then the introduction of naive traders has an ambiguous effect on efficiency.

Original language	English
Pages (from-to)	544-557
Number of pages	14
Journal	Games and Economic Behavior
Volume	72
Issue number	2
DOIs	https://doi.org/10.1016/j.geb.2010.09.009
Publication status	Published - 1 Jan 2011

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10.1016/j.geb.2010.09.009

Cite this

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